This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

The legendary economist Paul Samuelson once quipped that financial markets had predicted nine out of the last five recessions. In the same way, the experts have been confidently forecasting for more than half a decade now that housing prices in the hottest Canadian markets are heading for collapse.

Instead, as everyone knows, they have climbed relentlessly higher, even as politicians wring their hands about our growing household debt and tinker at the edges of policy to cool down heated markets.

Federal Finance Minister Bill Morneau is at it again, trying to rein in runaway housing prices in Vancouver and Toronto by tightening the rules on new mortgages for some people and cracking down on investors who fail to pay capital gains tax on their properties.

These are sensible measures, and they send yet another welcome message from Ottawa that Canadians ought not to plunge into massive debt on the assumption that home prices will keep rising at the torrid pace of the past few years.

Morneau, in short, is trying to let some of the air out of the housing bubble rather than stand by until it bursts with a loud and painful bang. He’s trying to persuade us that the experts aren’t entirely wrong about a possible dip in the market — it’s just their timing that’s off.

Article Continued Below

Of course, there’s no guarantee the new measures that Morneau announced this week will have the desired effect. The fundamental causes of rising prices in key markets are still present — record-low interest rates, a shortage of houses in the most desirable areas, land-use restrictions, and strong demand from both foreign and domestic money.

Still, Morneau is right to do what he can to drive home the uncomfortable truth that house prices do actually go down as well as up.

First, Ottawa will make it harder for some borrowers to qualify for insured mortgages. They’ll have to demonstrate they can sustain payments on a mortgage at the Bank of Canada’s “posted rate,” which is about 2 percentage points higher than what’s commonly offered by lenders. In other words, they’ll have to show they won’t go under if — or rather when — mortgage rates eventually increase by a significant amount.

Second, the government will close loopholes that have allowed some investors to avoid paying capital gains taxes by claiming their properties as principal residences even if they don’t live there.

That measure is aimed largely at wealthy foreign (mostly Chinese) investors who are widely blamed for inflating the Vancouver housing market, in particular. They won’t be able to claim exemption from taxes on the profits of a house sale if they weren’t residents of Canada when they bought it.

But the new rules will affect anyone who wants to claim the capital gains exemption. For the first time, sellers will have to report the sale of their primary residence to the tax authorities and show that they qualify.

It’s hard to say what impact that will actually have on housing markets, such as Vancouver and Toronto, where foreign buyers play a significant role. But other measures aimed at the controversial “foreign factor” in roaring house prices are already biting.

In August the British Columbia government imposed a 15-per-cent tax on foreign buyers of residential property in Greater Vancouver. Sales plunged 26 per cent in August and almost 33 per cent in September, and prices there appear to be finally levelling off.

In the meantime, the message for home buyers in Canada’s hottest real estate markets is clear: Don’t get in deeper than you can safely handle. The party has been going on for a long time, and closing time may be nearer than you think.

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com